A 10% fall in letters sent during Royal Mail's (RMG) key festive trading period has seen analysts cut profit forecasts.

Shares in Royal Mail trade 5% lower at 427p on the slump in letter volumes during the three months to 25 December, which is linked to lower direct mail spend by advertisers.

But analysts at investment bank Davy now see limited further downside in the company's share price because of a high dividend yield which is well covered by cash flow.

Royal Mail share price

LETTER VOLUMES DOWN 10%

UK parcels, letters and its international mail division, which Royal Mail refers to as UKPIL, saw a revenue decline of 4%. This was driven by a 10% drop in letters and 3% growth in parcels, according to calculations by analysts at investment bank Davy.

Faster-than-expected declines in letters – Royal Mail expects volumes to decline between 4% and 6% a year – may be the result of fewer direct mail advertising campaigns.

Trading in Royal Mail’s European parcels and logistics business GLS was much stronger, posting top line growth of 9% in the three months to 25 December.

EARNINGS PER SHARE ESTIMATES CUT

Davy analyst Allan Smylie says earnings per share forecasts of 42.7p in the year to end-March 2017 and 44.3p a year after are likely to be reduced slightly after today’s update.

But Smylie expects selling pressure to ease as the stock now boasts a dividend yield of over 5% which is forecast to be covered almost two times by cash flow in Royal Mail's 2017/18 financial year.

‘While Brexit-driven macro weakness has been our primary concern on the stock, we now think we are at valuation levels that should prove supportive,’ writes Smylie in a commentary today.

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Issue Date: 19 Jan 2017